Eco Projectt On Inflation, Money Supply and GDP

IBS HYDERABAD
Impact of
Macroeconomic
Factors On Money
Supply
Managerial Economics and Business
Environment
Section- K
13/01/2010
MANAGERIAL ECONOMICS AND BUSINESS ENVIRONMENT PROJECT WORK, BATCH OF

2011, IBS HYDERABAD
SUBMITTED BY:
SUBMITTED TO:
Impact of Macroeconomic Factors On 201
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NEETU PILLAI (09BSHYD0493)

PROF. TRILOCHAN TRIPATHY
PREETISH KR. SINGH (09BSHYD0585)
SULABH GOEL (09BSHYD0872)
VARUN BHATIA (09BSHYD0957)
2 IBS Hyderabad, Section K, Batch of 2011

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ACKNOWLEDGEMENT
This project work on Managerial Economics and Business Environment
is a result of coordinated effort between us and our esteemed faculty
Prof. Trilochan Tripathy under whose guidance we have put forward
this work of endeavour. This work would not have come into the shape
it is now without his constant inspiration and motivation to guide us
through this project work. It gives us immense pleasure to be able to
work under him.
We would also like to thank our colleagues who have been pillars of
support to us and provided us necessary inputs to make this work a
enjoyable experience.
Thank You.

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NEETU PILLAI
PREETISH KR. SINGH
SULABH GOEL
VARUN BHATIA
DATED: 13.01.2010

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CONTENTS
1) Abstract--------------------------------------------------------------------------------
--------------4
2) Objective------------------------------------------------------------------------------
---------------5
3) Methodology--------------------------------------------------------------------------
--------------5
4) Data
Source----------------------------------------------------------------------------------
--------5
5) Introduction---------------------------------------------------------------------------
--------------6
6) Impacts of
inflation--------------------------------------------------------------------------------
8
7) Types of
money----------------------------------------------------------------------------------
-10
8) Components of money
supply-----------------------------------------------------------------11
9) Link of GDP with money
supply----------------------------------------------------------------14

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10)Effect of GDP on money
supply----------------------------------------------------------------16
11)Effect of inflation on monetary
transmission----------------------------------------------17
12)The supply of and demand for
money-------------------------------------------------------18
13)Shifts in the money market due to
inflation------------------------------------------------20
14)Regression
analysis-------------------------------------------------------------------------------
22
15)Conclusion----------------------------------------------------------------------------
--------------30
16)References----------------------------------------------------------------------------
--------------31

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ABSTRACT
Through this project work we would like to assess the impact of

macroeconomic factors on money supply. The various factors that
influence the circulation of money in a macroeconomic environment
have been dealt with in this case through simple statistical tools like
Microsoft Excel and SPSS 13.0. The factors considered herein are GDP
and Inflation rate. As future managers we would like to get an insight
into what factors influences the supply of money in a economy.
Through this project we have attempted to link the theoretical
concepts garnered from the classes conducted by our faculty to the
real life situation by taking data from real sources. By studying the
practical situation and linking it with the theory we are making an
attempt to conceptualize the learning gathered so far.

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OBJECTIVE:
To study the impact of macroeconomic factors on money supply and
how they are related to each other.
DATA SOURCE:
To study the aforesaid phenomena, we have taken genuine data from
sources that are valid. We have taken at least 15 years of data for this
purpose from sources such as Reserve Bank of India’s Statistical
Report, www.investopedia.com, www.wikipedia.com,
www.economicsguide.com, www.indiabudget.nic.in,
www.iloveindia.com .
METHODOLOGY:
After collecting the required data, we have analyzed the same through
statistical tools such as SPSS 13.0 and Microsoft Excel 2007. Through
the above softwares we have run regression analysis to interpret the
effect of GDP and Inflation on money supply. The various determining
factors obtained in a regression analysis have then been interpreted to

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achieve our goal of understanding the relationship between the
mentioned macroeconomic variables.

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Effect of Macroeconomic factors

on Money Supply
INTRODUCTION:
Inflation and monetary policy are closely related concepts wherein the
latter can be used efficiently to reduce the effect of the former.
Inflation is the rise in prices and wages that reduces the purchasing
power of money. Monetary policy is the regulation adopted by the
central bank, which stabilizes the prices and maximizes production and
employment of the country.
Monetary policy is a regulation of a central bank which controls size

and growth rate of the money supply. Monetary policy directly
influences the interest rates which in turn has a negative relation with
the price level. In the face of inflation the central bank of the country
generally resorts to a rise in the cash reserve ratio, repo rate and
reverse repo rate. The basic idea is to reduce the money supply in the
economy. This would reduce aggregate demand. This reduction would
again help reduce the price level. Monetary policy is adopted with an
objective to make the most of production and employment and
consequently stabilize the price level of a country. Monetary policy also

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regulates the interest rate, availability of credit and at the same time
promotes the overall economic growth of a country.
Inflation occurs when the general level of prices is increasing. Today

we calculate inflation by using price indexes-weighted averages of the
prices of thousands of individual products. The CPI measures the cost
of a market basket of consumer goods and services relative to the cost
of that bundle during a particular base year. The GDP deflator is the
price of GDP. In India, inflation is measured through WPI (Wholesale
Price
Index) which includes a basket of 435 goods sans services. The recent
WPI Index of Indian inflation is given below:-

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Source: www.rbi.org.in/scripts/AnnualPublications.aspx?
head=Macroeconomic and Monetary Developments.html
Impacts of inflation:

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Inflation affects the real economy in two specific areas: it can harm
economic efficiency, and it can affect total output. We begin with the
efficiency impacts:-
Inflation impairs economic efficiency because it distorts

prices and price signals. In a low inflation economy, if the market price
of a good rises, both buyers and sellers know that there has been an
actual change in supply and/or demand conditions for that good, and
they can react appropriately. By contrast in a high inflation economy,
its much harder to distinguish between changes in relative prices and
changes in the overall price level.
Inflation also distorts the use of money. Currency is money that

bears a zero nominal interest rate. If the if the inflation rate rises from
0 to 10% annually, the real interest rate on currency falls from 0 to
-10% per year. There is no way to correct this distortion. As a result of
the negative real interest rate on money, people devote real resources
to reducing their money holdings during inflationary times. They go to
the bank more often. Corporations set up elaborate cash management
schemes. Real resources are thereby consumed simply to adapt to a
changing monetary yardstick rather than to make productive
investments. The annual Inflation rate Y-o-Y basis for India:-

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Source: http://www.rbi.org.in/scripts/AnnualPublications.aspx?
head=Macroeconomic and Monetary Developments

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Types of money:
Commodity money: Money as a medium of exchange first came into

human history in the form of commodities. A great variety of items
have served as money at one time or other-cattle, olive oil, beer or
wine, copper, iron, gold, silver, diamonds etc. By the eighteenth
century commodity money was almost exclusively limited to metals
like silver and gold. These forms of money had intrinsic value, meaning
that they had use value in themselves. Because money had intrinsic
value, there was no need for the government to guarantee its value,
and the quantity of money was regulated by the market through the
supply and demand for gold or silver. The advent of monetary control
had led to a much more stable currency system. The intrinsic value of
money is now the least important thing about it.
Modern money: The age of commodity money gave way to the age of
paper money. The essence of money is now laid bare. Money is wanted
not for its own sake but for the things it will buy. We do not wish to
consume money directly; rather we use it by getting rid of it. Even
when we choose to keep money it is valuable only because we can
spend it later on. The use of paper money has become wide spread
because it is a convenient medium of exchange. Currency is easily
carried and stored. The fact that private individuals cannot legally
create money keeps it scarce. Given this limitation on supply currency
has value. It can buy things.
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COMPONENTS OF THE MONEY SUPPLY:
The major monetary aggregates are the quantitative measures of the

supply of money. They are known today as M1 , M2, M3 and M4
Narrow (Transactions) money: - One important and closely watched

measure of money is narrow or transactions money denoted by M 1,
which consists of items that are actually used for transactions. The
following are the components of M1:-
• Coins- Includes coins not held by banks.

• Paper Currency- More significant is paper currency. Most of us
know little more about a 100/- or 500/- bill than it is inscribed
with the picture of a statesman, that it bears some official
signatures, and that each has a numeral showing its face value.
Paper currency and coins are legal tender, which must be accepted for
all debts, public and private.

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• Checking Accounts- There is a third component of narrow money;
checking deposits or bank money. These are funds, deposited in
banks and other financial institutions, on which we can write
checks. The deposit is like any other medium of exchange.
Possessing the essential properties of money, bank checking
account deposits are counted as narrow money as part of M1.
Broad Money: - Sometimes called near money, M2 includes M1 as well

as other close substitutes for M1. More precisely the components of M2
are:-
• M1
• Savings accounts and small time deposits.

• Retail money market mutual funds.
These are near money because they are safe, guaranteed by the
government and can be quickly converted into M1.
M3: Equals M2 + large time deposits, institutional money-market

funds, short-term repurchase agreements, along with other larger
liquid assets. M3 is no longer published or revealed to the public by
the US central bank. However, it is estimated by the web site Shadow
Government Statistics. It is also estimated on a weekly basis by the
web site Now and the Future.
M4: M3 + All deposits with post office savings banks (excluding

National Savings Certificates)
The following figure gives the annual variations in monetary

aggregates (%) of India:-

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Source: http://www.rbi.org.in/scripts/AnnualPublications.aspx?
head=Macroeconomic and Monetary Developments
The variations in US monetary aggregates are given below from a

period of 1970-2007:-

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Source: http://en.wikipedia.org/wiki/Monetary_policy
LINK OF GDP WITH MONEY SUPPLY:
Monetary exchange equation

Money supply is important because it is linked to inflation by the equation of exchange:
MV = PQ
• M is the total dollars in the nation’s money supply
• V is the number of times per year each dollar is spent (velocity)
• P is the average price of all the goods and services sold during
the year

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• Q is the quantity of assets, goods and services sold during the
year
U.S. M3 money supply as a proportion of gross domestic product.
Source: http://en.wikipedia.org/wiki/Monetary_policy
• velocity = the number of times per year that money turns over in
transactions for goods and services (if it is a number it is always
simply nominal GDP / money supply)
• nominal GDP = real Gross Domestic Product × GDP deflator
• GDP deflator = measure of inflation.
The quantity of assets goods and service sold during the year could be
grossly estimated by GDP back in the 1960s. This is not the case
anymore because of the rise of financial transactions relative to real
transaction. Money supply may be less than or greater than the
demand of money in the economy. If the money supply grows faster
than its use, inflation in a class of goods or assets is likely to follow
(according to Milton Friedman, "inflation is always and everywhere a
monetary phenomenon"). This statement must be qualified slightly,

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due to changes in velocity. While the monetarists presume that
velocity is relatively stable, in fact velocity exhibits variability at
business-cycle frequencies, so that the velocity equation is not
particularly useful as a short run tool. Moreover, in the US, velocity has
grown at an average of slightly more than 1% a year between 1959
and 2005.
Monetarists reckon that to stabilize prices the rate of growth of the
money supply needs to be carefully controlled. However, implementing
this has proven difficult, as the relationship between measures of the
money supply identified by monetarists and the rate of inflation has
typically broken down as soon as policymakers have tried to target it.
Keynesian economists believe that inflation can occur independently of
monetary conditions. Other economists focus on the importance of
institutional factors, such as whether the interest rate is set by
politicians or (preferably) by an independent central bank, and whether
that central bank is set an inflation target.
Economists have noted that M3 growth may not affect all assets or
goods equally. For example, an almost constant rise in M3 in the
1970s, '80s and '90s produced a rise in consumer goods prices
"inflation" in the seventies and a rise in the stock market in the '80s
and '90s and a rise in home prices after 2001. When home prices went
down, the Federal Reserve kept its loose monetary policy and lowered
interest rates; the attempt to slow price declines in one asset class,
e.g. real estate, may well have caused prices in other asset classes to
raise, e.g. commodities.

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Effect of GDP on Money Supply:
Money supply and GDP do not automatically affect each other, but
Money Supply can affect GDP depending on monetary policy; the
expressed intention in economic management is to monitor the money
supply to allow transactions to take place. Therefore, if money supply
is severely restricted it is likely to affect the GDP: i.e.: reduce the
volume of transactions. The GDP can only increase the
demand of money... and transactions will stall if that demand is
not met. GDP is also inadequate as a measure of real
production, because it does not truly represent production, but it is a
statistic of dollar value of all transactions that have taken place. A
comparison of the two statistics maybe valuable after the fact to
examine the difference in growth ratio, to maybe predict near term
inflation, if money growth was too much larger than GDP.
Money is NOT increased as a result of greater ability to
produce, but it is increased intentionally to attempt to allow the
greater ability potential to materialize. Money supply affects GDP by
making transactions more efficient. You don't need to find someone to
trade with to get what you want, everyone takes money. The more of it
there is, the larger this effect becomes.
GDP affects money supply through the banking system. When growth
is high, banks make additional loans and expand the money supply.
The Federal Reserve also has something to do with it, but the dynamic
aspects of money supply rest with the banking sector.

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THE EFFECT OF INFLATION ON MONETARY TRANSMISSION
Having examined the building blocks of money, we now describe the

monetary transmission mechanism, the route by which changes in the
supply of money are translated into changes in output, employment,
prices and inflation. The Reserve Bank is concerned about inflation and
has decided to slow down the economy. There are five steps in the
process:-
• To start the process, the Reserve Bank takes steps to reduce

bank reserves. Reserve Bank reduces bank reserves primarily by
selling government securities in the open market. This open
market operation changes the balance sheet of the banking
system by reducing total bank reserves.
• Each dollar reduction in bank reserves produces a multiple
contraction in checking deposits, thereby reducing the money
supply. Since the money supply equals currency plus checking

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deposits, the reduction in checking deposits reduces the money
supply.
• The reduction in the money supply increases interest rates and

tightens credit conditions. With an unchanged demand for
money, a reduced supply of money will raise interest rates. In
addition the amount of credit (loans and borrowing) available to
people will decline. Interest rates will rise for mortgage borrowers
and for businesses that want to build factories, buy new
equipment, or add to inventories. Higher interest rates tend to
reduce asset prices (such as those of stocks, bonds, houses) and
therefore depress the values of peoples’ assets.
• With higher interest rates and lower wealth, interest sensitive

spending-especially investment, tends to fall. The combination of
higher interest rates, tighter credit and lower wealth tends to
reduce investment and consumption spending. Businesses will
scale down their investment plans, as will state and local
governments. For example, higher interest rates may lead
airlines to stretch out their purchases of new aircraft. Similarly
consumers may decide to but a smaller house, or to renovate
their existing one, when rising mortgage interest rates increase
monthly payments relative to monthly income. In an economy
increasingly open to international trade, higher interest rates
may raise the foreign exchange rate depressing net exports.
Hence, tight money will raise interest rates and reduce spending
on interest sensitive components of aggregate demand.
• Finally, the pressures of tight money, by reducing aggregate

demand, will reduce income, output, jobs and inflation. The

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aggregate supply and demand analysis shows how a drop in
investment and other autonomous spending may depress output
and employment sharply. Furthermore, as output and
employment fall below the levels that would otherwise occur,
prices tend to rise less rapidly or even to fall. Inflationary forces
subside.
THE SUPPLY OF AND DEMAND FOR MONEY
One major step in the transmission mechanism is the response of

interest rates and credit conditions to changes in the supply of money.
The demand for money depends primarily on the need to undertake
transactions. Households, businesses and governments hold money so
that they may buy goods, services and other items. In addition, some
part of the demand for money derives from the need for a safe and
highly liquid asset.
The supply of money is jointly determined by the private banking

system and the nation’s central bank. The central bank, through open
market operations and other instruments, provides reserves to the
banking system. Commercial banks then create deposits out of the
central bank reserves. By manipulating reserves, the central bank can
determine the money supply within a narrow margin of error.
The supply and demand for money jointly determine the market
interest rates. The following figure shows the total quantity of money M
on the horizontal axis and the nominal interest rate i on the vertical
axis. The supply curve is drawn as a vertical line on the assumption
that the Central Bank keeps the money supply constant at M*. In
addition we show the money demand schedule as a downward sloping
curve because the holdings of money decline as interest rates rise
i Section
D
26 IBS Hyderabad, K, Batch of 2011
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during inflation. At higher interest rates, people and businesses shift
more of their funds to higher yield assets.
per Year
Interest Rate Percent
D
S
0 M
M*
MONEY
The intersection of the supply and demand schedules in the figure
determines the market interest rate. Interest rates are the prices paid
for the use of money. In the figure, the equilibrium interest rate at the
point of intersection of supply and demand. Only at this point is the
level of the money supply that the Central Bank has targeted
consistent with the desired money holdings of the public. During
inflation, at a higher interest rate, there would be excessive money
balances. People would get rid of their excessive money holdings by
buying bonds and other financial instruments, thereby lowering market
interest rates towards the equilibrium rate.

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Shifts in the Money Market due to Inflation:
To understand the monetary transmission mechanism, we need to see

how changes in the money market due to Inflation affect interest rates.
The Central Bank becomes worried about Inflation and tightens
monetary policy by selling securities and reducing the money supply.
The impact of a monetary tightening is shown in the following figure.
The leftward shift of the money supply schedule means that market
interest rates must rise to induce people to swap their money for
bonds and other non-monetary assets. The gap between E and N
shows the extent of excess demand for money at the old interest rate.
Interest rates rise until the new equilibrium is attained shown at point
E’, with a new and higher interest rate.
i
D
Interest Rate Percent per
S’ S
Year
N
E
28 IBS Hyderabad, Section K, Batch of 2011 D

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M
0 M*1 M*
Money
There are also frequent shocks to money demand due to cost push
Inflation. With higher prices the demand for money would increase,
shifting the money demand curve to the right from DD to D’D’ as
shown in the following figure and leading to an increase in equilibrium
interest rates.
i
D’
D
Interest Rate Percent per
S
Year
E’
D’
E
D
0 M
M*
Money

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The money market is affected by a combination of the public’s desire
to hold money (represented by demand-for-money DD curve) and the
Central Bank’s monetary policy (which is shown as a fixed money
supply SS). Their interaction determines the market interest rate, i.
During Inflation a restrictive monetary policy shifts the SS curve to the
left, raising market interest rates. Likewise due to Inflation an increase
in the cost of goods and services shifts the DD curve to the right and
raises interest rates.
REGRESSION ANALYSIS
SAMPLE DATA:
GDP (% Inflation rates money supply(%

YEAR change) (%change) change)
1993-1994 10.61188595 -46.03 7.7565
1994-1995 9.393857595 60.52 4.7655
1995-1996 12.74847483 0.13 5.3455
1996-1997 4.934554847 -12.21 6.8756
1997-1998 5.826574949 -20.2 5.98765
1998-1999 4.162765716 -64.7 6.951871658
1999-2000 11.46848531 -14.15 6
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2000-2001 7.698581224 -5.74 6.132075472
2001-2002 8.544774948 13.71 9.777777778
2002-2003 7.564094249 -11.43 1.214574899
2003-2004 12.22462998 -1.02 4
2004-2005 14.33173045 12.72 5.769230769
2005-2006 14.74366444 45.48 3.745454545
2006-2007 14.26298757 3.16 5.152471083
2007-2008 14.39094463 18.71 4.333333333
2008-2009 12.66788754 12.18 3.514376997
THE GDP FIGURES ARE GIVEN BELOW:-
Source: www.rbi.org.in/scripts/AnnualPublications.aspx

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THE MONEY SUPPLY FIGURES ARE GIVEN BELOW:-

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Source: www.rbi.org.in/scripts/AnnualPublications.aspx

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THE INFLATION FIGURES ARE GIVEN BELOW:-
Source: http://www.financegurukul.com/?p=986
YEAR RATE %CHANGE
1993 6.362 -46.03 %

1994 10.212 60.52 %
1995 10.225 0.13 %
1996 8.977 -12.21 %
1997 7.164 -20.20 %
1998 13.231 84.69 %
1999 4.67 -64.70 %
2000 4.009 -14.15 %
2001 3.779 -5.74 %
2002 4.297 13.71 %
2003 3.806 -11.43 %
2004 3.767 -1.02 %
2005 4.246 12.72 %
2006 6.177 45.48 %
2007 6.372 3.16 %
2008 5.18 -18.71 %

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From the above found sources of data the following table has been
generated for the purpose of regression analysis:-
G MI Y
D on
P nf
el
a ya
t t
m s i
a uo
r pn
k p
e l R
t ya
p t
r e
i
c
e
s
(
r
u
p
e
e
s
i
n
c
r
o
r
e

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s
)
1
1 1 1
2 5 0
7 0 .
6 7
2
5 0
5 0 1
8 0 2
1
1 1 1
3 6 0
9 9 .
5 4
2
8 0
4 9 2
5 0 5
1 1 1
5 7 8
4 4 .
8 0
9
5 0
7 0 7
9 0 7
1 1 1
6 9 7
8 8 .
9 5
1
5 7
9 5 6
5 8 4
1
1 2 1
7 0 3
5 0 .
1 0
2
1 0
9 0 3
9 0 1
1 2 1

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9 1
5 2 4
2 0 .
0 0 6
3 0
7
5 0
2 2 2
1 2 4
0 5 .
2 0
0
3 0
1 0 0
4 0 9
2 2 2
2 4 3
8 7 .
1 0
7
9 0
5 0 7
2 0 9
2 2 2
4 5 4
5 0 .
4 0
2
5 0
6 0 9
1 0 7
2 2 2
7 6 3
5 0 .
4 0
8
6 0
2 0 0
2 0 6
3 2 2
1 7 3
4 5 .
9 0
7
4 0
0 0 6
7 0 7
3 2 2

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6 8 4
1 5 .
3 3
2
7 0
4 0 4
5 0 6
4 3 2
1 0 6
2 0 .
9 0
1
1 0
7 0 7
3 0 7
4 3 2
7 1 6
2 3 .
3 0
3
4 0
0 0 7
0 0 2
5 3 2
3 2 5
2 4 .
1 0 1
7 0 8
5 0
5 0
Analysis :
For the purpose of analysis, a 15 year period data is being considered.
Through the data given above, the following data regression analysis
has been done using Microsoft Excel software by copying the data into
a spreadsheet. Then through Data Analysis add-in, the results are

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generated by running Regression. The first summary output obtained
below is a simple regression model between money supply and GDP
while the next summary output model is the result showing the
multiple regression model between money supply, GDP, inflation rate.
SU M M
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SU M M
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Interpretation:
In our regression analysis we have considered money supply as the

dependent variable while GDP and Inflation as the independent
variables. Herein we are studying the effect of these independent
variables on the dependent variable i.e. money supply and how far are
these significant in explaining the change in money supply.
In our first summary output we did a simple regression between money

supply and GDP and found the R square value to be 93% which shows
that the change in money supply is significant to an extent of 93% due
to a corresponding change in GDP. Further the P value is 1.3E which is
less than the value of α which is 0.05 for a 95% level of significance.
This means that GDP is a significant explanatory variable to correlate
the changes in money supply.

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In our last summary output we did a multiple regression wherein we
took money supply as the dependent variable and GDP and inflation as
the independent variables. Through this analysis we come to know that
the R square value is 96% an increase of 3% over the simple
regression output. This explains that the relation of GDP and inflation
with the money supply together is more than it is individually. It
explains for 96% significance in the value of money supply relative to
GDP and Inflation. Further the P value of 0.03 and 2.99E is less than α
value of 0.05, so we again conclude that each one is a significant
explanatory variable.
CONCLUSION
The money supply is ultimately determined by the policies of the

Central Bank. By setting reserve requirements and the discount rate,
and especially by undertaking open market operations, the Central
Bank determines the level of reserves, the money supply and short
term interest rates based on the Inflation rate and the GDP figures.
Inflation rates and GDP figures have a direct impact on the money
supply since their increase and decrease determines the level of
circulating money in the system as and when required by the Central
Bank. Banks and the public are cooperating partners in this process.
Banks create money by multiple expansions of reserves; the public
agrees to hold money in depository institutions.

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Through our regression analysis we have come to conclude that both

GDP and Inflation rate have a significant impact on the changes in
money supply observed over a period of 15 years in this project work.
The regression values are highly significant in explaining the
relationship between the dependent and independent variables.
Thus, we conclude that macroeconomic factors like GDP and Inflation

rate have a considerable impact on money supply.
REFERENCES
1. Wyplosz & Burda 1997 (Glossary);
2. Blanchard 2000 (Glossary)
3. Barro 1997 (Glossary)

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4. Abel & Bernanke 1995 (Glossary)
5. Why price stability?, Central Bank of Iceland, Accessed on

September 11, 2008.
6. Mankiw 2002, pp. 22-32
7. Robert Barro and Vittorio Grilli (1994),
8. European Macroeconomics, Ch. 8, p. 139, Fig. 8.1. Macmillan,

ISBN 0333577647.
9. Mankiw 2002, pp. 81-107
10. Abel & Bernanke 2005, pp. 266-269
11. Hummel, Jeffrey Rogers. "Death and Taxes, Including Inflation:

the Public versus Economists" (Jan 2007). [1]
12.Taylor, Timothy (2008), Principles of Economics, Freeload Press,

ISBN 193078905
13.Annual Report (2006), Royal Canadian Mint, p. 4
14. Frank Shostak, "Commodity Prices and Inflation: What’s the

connection", Mises Institute
15. Michael F. Bryan, "On the Origin and Evolution of the Word
’Inflation’"
16. Mark Blaug, "Economic Theory in Retrospect", pg. 129: "...this

was the cause of inflation, or, to use the language of the day, ’the
depreciation of banknotes.’"
17. Kiley, Michael J. (2008), "Estimating the common trend rate of
inflation for consumer prices and consumer prices excluding food
and energy prices" (PDF),

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18. Finance and Economic Discussion Series (Federal Reserve Board),
http://www.federalreserve.gov/Pubs/feds/
2008/200838/200838pap.pdf:
19. Taylor & Hall 1993;
20. Blanchard 2000;
21.Barro 1997
22. Mankiw 2002, p. 22-32
23. Mankiw 2002, p. 81-107
24. Bulkley, George (March 1981). "Personal Savings and Anticipated

Inflation". The Economic Journal 91 (361): 124–135.
doi:10.2307/2231702. http://www.jstor.org/pss/2231702.
Retrieved on 2008-09-30.
25. Encyclopedia Britannica, "The cost-push theory".
26. Thorsten Polleit, "Inflation Is a Policy that Cannot Last", Mises

Institute
27.Tobin, J., Econometrica, V 33, 1965 "Money and Economic

Growth"
28. Federal Reserve Board’s semiannual Monetary Policy Report to

the CongressRoundtableIntroductory statement by Jean-Claude
Trichet on July 1, 2004
29. Robert J. Gordon (1988), Macroeconomics: Theory and Policy, 2nd

ed., Chap. 22.4, ’Modern theories of inflation’. McGraw-Hill.
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Money Supply 0
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Eco Projectt On Inflation, Money Supply and GDP

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IBS HYDERABAD

MANAGERIAL ECONOMICS AND BUSINESS ENVIRONMENT PROJECT WORK, BATCH OF

NEETU PILLAI (09BSHYD0493)

PREETISH KR. SINGH (09BSHYD0585)

SULABH GOEL (09BSHYD0872)

VARUN BHATIA (09BSHYD0957)

2 IBS Hyderabad, Section K, Batch of 2011

3 IBS Hyderabad, Section K, Batch of 2011

PREETISH KR. SINGH

4 IBS Hyderabad, Section K, Batch of 2011

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Through this project work we would like to assess the impact of

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Effect of Macroeconomic factors

Monetary policy is a regulation of a central bank which controls size

10 IBS Hyderabad, Section K, Batch of 2011

Inflation occurs when the general level of prices is increasing. Today

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Inflation impairs economic efficiency because it distorts

Inflation also distorts the use of money. Currency is money that

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Commodity money: Money as a medium of exchange first came into

COMPONENTS OF THE MONEY SUPPLY:

The major monetary aggregates are the quantitative measures of the

Narrow (Transactions) money: - One important and closely watched

• Coins- Includes coins not held by banks.

16 IBS Hyderabad, Section K, Batch of 2011

Broad Money: - Sometimes called near money, M2 includes M1 as well

• Savings accounts and small time deposits.

M3: Equals M2 + large time deposits, institutional money-market

M4: M3 + All deposits with post office savings banks (excluding

The following figure gives the annual variations in monetary

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The variations in US monetary aggregates are given below from a

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LINK OF GDP WITH MONEY SUPPLY:

Monetary exchange equation

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U.S. M3 money supply as a proportion of gross domestic product.

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Effect of GDP on Money Supply:

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THE EFFECT OF INFLATION ON MONETARY TRANSMISSION

Having examined the building blocks of money, we now describe the

• To start the process, the Reserve Bank takes steps to reduce

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• The reduction in the money supply increases interest rates and

• With higher interest rates and lower wealth, interest sensitive

• Finally, the pressures of tight money, by reducing aggregate

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THE SUPPLY OF AND DEMAND FOR MONEY

One major step in the transmission mechanism is the response of

The supply of money is jointly determined by the private banking

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Shifts in the Money Market due to Inflation: